Brief Event-Driven: McMillan’s Offer For Eclipx Wobbles and more

In this briefing:

1. McMillan’s Offer For Eclipx Wobbles
2. Softbank: A Strong Tender Result
3. LG Chem Share Class: Common Discount to 1P Should Be Reverted at This Point
4. Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank
5. The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts

1. McMillan’s Offer For Eclipx Wobbles

Thirty minutes after Eclipx (ECX AU) guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU) announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.

As to ECX’s FY19 guidance:

• FY19 NPATA (net profit after tax and before amortisation) is expected to be broadly flat vs. FY18.
• 1H19 is expected to ~40% of FY19 NPATA.
• Certain equipment finance exposure has emerged in 1Q19, which will result in expected provisions of A$2.3mn and an allowance for further provisioning of A$0.8mn.
• FY19 net profit is expected to grow versus FY19 but this is “due to the average corporate tax rate for FY18 being 25% compared to the estimated FY19 corporate tax rate of 29%.”

The key MACs (Material Adverse Effect) under the SIA, means a specified event, which is reasonably likely to have:

a material adverse effect on the business, assets, liabilities, financial or trading positions, profitability or prospects of ECX taken as a whole; OR

the effect that the value of the net tangible assets of ECX is reduced by at least A$13mn, measured against the net tangible assets stated in the ECX audited FY18 financial statements;

the effect that the value of the annual NPATA of ECX is reduced by at least 10% measured against the NPATA stated in EXC’s audited FY18 financial statements. (my emphasis)

That word may prove to be significant.

But at a 20% gross spread to terms (ECX is down ~19% as I type) and trading bang in line with its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal, the negative news surrounding the NPATA guidance and the MACs appears fully priced in.

2. Softbank: A Strong Tender Result

Softbank Group (9984 JP) released the results of its 750mn USD tender for its Euro and USD commercial paper, which could also portend further support for the equity ahead of results next Wednesday. More details below.

3. LG Chem Share Class: Common Discount to 1P Should Be Reverted at This Point

• LG Chem Common/1P duo is currently at -180% of σ on a 20D MA. This -180% level is something we haven’t seen since mid October last year. Yesterday alone, the duo made a -130% jump. Pref discount is at 42.86%, slight below 120D average.
• It can be easily seen that LG Chem is entering a price correction phase after nearly one month of price rally. But foreign buying is still very strong. There is no red flag at short selling side either. I don’t see this assumption really holds true.
• Strong market sentiments on LG Chem’s EV batteries are still very much alive. Although Jan 30 4Q numbers might have already priced in, Tesla China factory expectations are yet to be priced in. I expect a mean reversion at this point. I’d go long Common and short 1P. Liquidity shouldn’t be an issue.

4. Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank

It was announced today that Saudi Aramco plans to purchase up to 19.9% stake in Hyundai Oilbank for about 1.8 trillion won from Hyundai Heavy Industries Holdings (267250 KS) (HHIH), which would suggest nearly 9 trillion won in total value for Hyundai Oilbank. The following are the major highlights of the potential investment in Hyundai Oilbank by Saudi Aramco:

• Higher dividends for both Hyundai Oilbank and Hyundai Heavy Industries Holdings – At end of 2018, HHIH converted nearly 2 trillion won of capital surplus into retained earnings, which should allow the company to pay out higher dividends. HHIH has already declared that its long term plans include maintaining a 5% dividend yield and more than 70% dividend payout. 
• Greater Investments in Robotics – HHIH is likely to use a big portion of the proceeds from the sale of its stake in Hyundai Oilbank to further invest in the robotics business.
• Our sum-of-the-parts valuation of Hyundai Heavy Industries Holdings suggests a value of 487,000 won, which is 28% higher than current share price. 

5. The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts

In this version of the GER weekly events wrap, we assess the recent lock-up expiry for Pinduoduo (PDD US) which may have led to a short squeeze. Secondly, we assess the debt tender for Softbank Group (9984 JP) which may be supporting the equity. Finally, we provide updates on bids for M1 Ltd (M1 SP) and Healthscope Ltd (HSO AU) as well as update a list of upcoming M&A and equity bottom-up catalysts. 

The rest of our event-driven research can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun